Due to the renegotiations of a number of tax treaties, the Netherlands has suddenly become the top jurisdiction for foreign investors looking to invest in India. The Netherlands now holds the unique status of being the only major investor into India where shareholders in Indian companies are not subject to tax on a disposal of their shares, neither in India (based on the tax treaty), nor in the Netherlands (due to the participation exemption).
India has recently renegotiated its tax treaties with Mauritius and Cyprus. One of the important changes is that India will have the right to tax capital gains arising from a disposal of shares by a foreign shareholder in an Indian company, which have been acquired after April 1, 2017. However, existing structures are not affected. It is likely that the foregoing will also affect the tax treaty between India and Singapore, due to a specific clause included in that tax treaty. This clause provides that Singapore has the right to tax capital gains on shares held by its residents in an Indian company, as long as the tax treaty between India and Mauritius provides for a similar clause. Hence, it seems that going forward Singaporean investors in Indian companies may be confronted with Indian taxation on capital gains as well. It is not yet clear how the aforementioned grandfathering clause in India's tax treaties with Mauritius (and Cyprus) will affect the position of Singapore.
Historically, Mauritius, Singapore and Cyprus have been among the largest direct investors into India (see table below).
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The Netherlands is already quite popular in terms of direct investment into India - ranking in 6th place. However, the tax treaty developments give the Netherlands a unique position and unprecedented competitive advantage when it comes to investing in Indian companies: As a result of the amendment of those treaties, the Netherlands is now the only major investor that:
i. fully exempts capital gains arising from the disposal of (qualifying) shares in an Indian company; and
ii. has a tax treaty, which in most cases prevents India from taxing such capital gains.
At this point, there are no signals that the tax treaty between India and the Netherlands will be renegotiated in a way similar to the tax treaties mentioned above anytime soon.
The tax treaty renegotiations with Mauritius and Cyprus take place against the backdrop of the Vodafone case, in which the Supreme Court of India ruled that the Indian tax authority does not have taxing rights outside of its own jurisdiction. Following this judgement, the Government of India amended the domestic Income Tax Act in 2012 and initiated the renegotiation of similar provisions in the tax treaties with Mauritius, Cyprus and Singapore. Again, through the beneficial provisions of the tax treaty between India and the Netherlands, these rules do not apply to residents of the Netherlands.
On top of that, the Netherlands offers many other advantages both in terms of the overall business environment, geography as well as the Dutch tax regime. Please see below some of the benefits of investment in or through the Netherlands:
The Netherlands is a EU member state. This means that companies benefit from the free movement of people, access to an internal market of 27 EU members states and other regulatory as well as tax benefits.
The Netherlands is well-connected. Located by the North Sea, it has the largest European seaport and is based in the heart of Europe's largest consumer and major industrial regions. Schiphol Airport offers (direct) flights to virtually every location. Also, in terms of infrastructure, the Netherlands is ahead of the curve.
The Netherlands has a pleasant (business) environment. The Netherlands has a stable legal system, a strong international focus and a high standard of living. Language should not form an obstacle as over 75% of the population speaks English fluently. Additionally, the Netherlands boasts countless museums, a large number of international schools and excellent healthcare facilities.
The Netherlands offers a full participation exemption. This exemption is one of the most important provisions of Dutch CIT legislation and the reason why a tremendous number of International HQs are located in the Netherlands. The objective of the exemption is to avoid double taxation when profits of a subsidiary are distributed to its parent company.
No withholding taxes The Netherlands does not levy any withholding tax on interest payments or royalty payments by a Netherlands based entity. Withholding taxes on dividends can often be reduced to zero if structured properly.
The Netherlands offers certainty in advance. Foreign investments are very important for an open economy such as the Netherlands. The tax authorities are generally willing to provide comfort on tax implications in advance and on short notice, either through an ATR or an APA.
The Netherlands offers a special tax regime for expats: the 30% ruling. To encourage highly skilled migrants to relocate to the Netherlands and reimburse them for the extra cost of living abroad, the Dutch government offers a substantial income tax exemption for up to 96 months for expats.
Not only is the Netherlands an excellent location for foreign investments into India. It is also an excellent location for Indian companies, looking to invest into Europe. A large number of Indian multinationals have already chosen this route. Prominent examples include Wipro Infosys, Tata Consultancy Services, Sun Pharma, Apollo Tyres, Dr. Reddy's Laboratories and Tata Steel.
Conclusively, both non-Indian multinationals looking to invest into India and Indian multinationals looking to expand into Europe, should consider the Netherlands as an ideal HQ location for global investments.